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Saudi, Oman most exposed to diminishing fiscal uplift from SWF buffers: Moody’s

10 Feb 2021

The impact of the coronavirus pandemic on oil demand and prices has significantly increased gross funding requirements for sovereigns across the GCC, which will be partly funded by drawing down sovereign wealth fund (SWF) assets, Moody’s Investors Service said in a report on Wednesday.

The increased drawdowns on SWF assets, Moody’s said, will lead to substantial erosion of these buffers in Saudi Arabia and Oman, reducing the uplift to fiscal strength from SWFs.

‘The stock of SWF assets in Qatar and Abu Dhabi remains more than ample to cover decades of fiscal deficits at current levels. However, for Oman and Saudi Arabia, which possess a more modest stock of SWF assets, significant drawdowns will lead to substantial erosion of their SWF buffers over the medium term, reducing the uplift to fiscal strength derived from these assets, and increasing external vulnerability risks in Oman,’ Moody’s said.

Moody’s expects oil prices to remain below their pre-coronavirus path, due to long-lasting reductions in oil demand in sectors like aviation. ‘Markedly lower hydrocarbon revenues will translate into persistently higher budget deficits – despite some adjustments to expenditure and non-oil revenue measures – leading to higher financing requirements.’

In Kuwait, very large fiscal deficits have largely depleted the liquid portion of the smaller General Reserve Fund, increasing liquidity risks in the absence of a debt law despite the large stock of assets held in the Future Generations Fund, which are currently ringfenced from the general budget, the agency said.

“While the recovery in equity market valuations last year reversed the paper losses facing GCC sovereign wealth funds, lower oil prices will keep transfers flowing out of most SWFs on a net basis,” said Thaddeus Best, a Moody’s analyst and the report’s co-author.

While the governments are drawing more heavily on their SWF buffers, lower oil prices will significantly reduce the flow of assets to GCC SWFs, which are almost entirely derived from excess hydrocarbon revenue.

Moody’s, however, added that the reserve adequacy remains more than ample to support most GCC currency pegs.


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